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SIMON BROWN: I’m chatting now with Nico Katzke, head of portfolio solutions at Satrix. Nick, always appreciate the early morning. We are talking around ‘bubbles’ and whether we should worry. There’s an interesting piece out from you.
Let’s start, I suppose, with definition of a bubble. I’m keen to head to Greenspan’s ‘irrational exuberance’ comment. I think that was in late ’96. But broadly, it’s irrational pricing in FOMO [fear of missing out]; but underlying it is often proper quality.
We think of some of those dotcom stocks. Capitec was often accused of being a bubble. Yet here we are today.
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NICO KATZKE: Morning, Simon and good morning to listeners. It’s great to speak to you again. Yes, interesting topic – and I think it’s incredibly relevant to us all. Our view on AI and technology stocks more broadly has actually been quite consistent in recent years.
We remain of the view that, to your point, based on traditional accounting measures tech companies may look expensive now. Absolutely.
But we have to acknowledge the inadequacy of traditional accounting and asset-pricing models in valuing technology companies whose book values often reflect immaterial things like IP, first-mover benefits, network effects – and the list goes on.
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So to the casual observer the problem is that when experts make statements to the effect of labelling companies or entire sectors as ‘overvalued’ and ‘clearly in bubble territory’, it’s not simply a matter of semantics. It directly affects investor behaviour.
Over the past few years we’ve seen many advisors and investors choose to sit on the sidelines and avoid tech exposure completely and tech-heavy sectors like the Nasdaq or the S&P 500, which have clearly not served their portfolios well.
The question I think remains why people are actually so quick to dismiss new technologies in the first place.
SIMON BROWN: That’s actually a great point because many of these bubbles – and to be clear, not necessarily always, but I’m running through various bubbles in my head – are usually about that new technology which, to your point, often current accounting principles don’t quite fit, truthfully, investor understanding.
SIMON BROWN: We throw around the term AI. We don’t know what AI is going to look like in 10 years’ time. We know it’s going to be something. But exactly what I don’t know.
NICO KATZKE: Absolutely. And I think it’s maybe important to take a step back and just ask what it means when we say, ‘a bubble’, I think it refers to periods – and you mentioned it at the start – where investors are irrational in their valuation of assets, where a buying frenzy leads others to participate as well, and this further pushes up the price and causes a reinforced frenzied buyer’s market.
Oftentimes what labels a bubble is that this happens without due consideration of the actual investment case. Now, to your point, there have been many examples of this in the past, but those are always only ever clear in hindsight; that’s the irony.
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And in fact, there are equally many times where many cried wolf, only to later regret not investing in the companies or technologies after their use cases have become clear.
That’s not how you make money in the market. Johnny come lately is a poor man. The reality is that Mr Market has in the past been remarkably efficient at pricing assets and predicting trends, offering very few instances of obvious opportunities to either buy or sell in hindsight.
But I think fundamentally, if we just come back, when it comes to valuing assets we always need to compare the price paid today with the future earnings potential of a company tomorrow.
Whenever future earnings potential is uncertain, it complicates the analysis. Let’s take a simple example.
If Ford retailed at multiple, multiple times its projected earnings, you’d more easily conclude whether it’s expensive or not, as its business model is actually quite well understood. It builds and sells cars, meaning its scaling potential is physically limited.
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But for companies building a technological framework whose end state is as of yet unknown, it becomes extremely complicated to do a fundamental analysis. And the best we can do, I believe for now, is to be slower in concluding that prices paid today for companies at the forefront of technological development are not a fair reflection of how these companies will mature.
Shouting ‘bubbles’ based solely on historical comparisons for me seems like lazy analysis that needs a deeper clarification of where exactly the market is being irrational.
SIMON BROWN: That’s a great point. I remember the early days of the internet – sort of early 2000s – and I remember the talk around watching a video on my phone. I thought this is the stupidest thing I’ve ever heard. But of course, I didn’t imagine what the phone was going to become, the speed or anything. Now that’s how we spend many of our days.
You also make a great point, and I take your point that bandying around the word ‘bubble’ in and of itself is not helpful. In fact, we can say it does a [disservice] to investors. But also the optimal number of bubbles you make in the article you write is not zero.
We need this because this is around that technological advancement. This is how society moves forward in those big leaps.
NICO KATZKE: Exactly. I make the point – it might be controversial – that bubbles generally get a bad rap. This may sound strange, but I really believe that the optimal number of bubble-and-busts is not zero.
We actually need periods where the market loses, let’s call it, its short-term sensibilities and relaxes its typical risk tolerance, spurring the development of technologies propelling society forward – internet, railways, et cetera – which at the time seemed expensive, irrational. But it’s stuff we use every day.
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Now I cannot foresee a world where we will become less reliant on generative assistance. And as we transition into this uncertain world, it seems to my mind most irrational to label the technology as a bubble. That’s, for me, the most irrational thing currently.
Now, will there be disappointment, Simon, in AI? Absolutely. Some companies will disappoint, but I believe ultimately that we are at an inflection point in how we utilise information technology more broadly.
Now, will you and I still use ChatGPT in five years? Maybe. Maybe not. How will we use it in our daily lives? Who knows?
From our point of view, AI integration will likely be more gradual than many make it out to be. I don’t think you’re going to wake up one day, and your wife and kids and job have been taken by AI.
I think broad adoption will happen organically, the same way we began using email or the computer or, more recently, become comfortable with teams calls and working from home.
These things happen gradually and dismissing the technology just because we deem the accounting measures to be out of whack with historical comparisons, I don’t think is sensible.
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Another interesting point that I just want to quickly make, which I think a lot of listeners might not know, is that as of today you’re getting actually more exposure to AI in the MSCI EM Index than in both the Nasdaq and S&P 500. That’s a great irony.
This is largely as a result of large exposures to TSMC [Taiwan Semiconductor Manufacturing Company] and a few Korean stocks.
But the point is it’s becoming harder to find suitable diversification for those looking to avoid tech exposure completely.
What we’ve seen is a lot of investors sitting on the sidelines and wanting no equity exposure because they look in the short term, and they want to avoid short-term pain but ultimately pay away long-term opportunities to create wealth over the long term.
SIMON BROWN: Yes. And your EM example is great. I was buying some of the EM ETFs last year and they’ve become tech. As you said, they are just tech, and we’re early.
Father got a fax machine in the ’80s and he couldn’t fax anyone for the first six months because no one else had one. And then five years later everyone had them. Twenty years later, they were gone because of email.
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We’ll leave it there. Nico Katzke, head of portfolio solutions at Satrix, appreciate the early morning time.